Contractors — Legal Aspects

Contractor licensing

If you’re confused about when and if a contractor you hire needs to hold a license, you’re not alone. Each state has its own set of licensing rules and regulations. The majority of states regulate at least a few home-repair related trades, but some don’t regulate any. Additionally, some cities, counties and other municipalities require their own licenses for trades, but many don’t.

In general terms, a contractor’s license typically involves a registration with the license-issuing agency and includes proving the contractor holds the minimum insurance and/or bonding as required by the municipality. Often, a license is required as a preliminary requirement for a contractor to be able to pull a permit at the local building department.

In some states and municipalities, the minimum threshold for requiring a license is based on the dollar value of the work. For instance, in New York City, any home improvement work that costs more than $200 is required to be performed by a city-licensed home improvement professional.

Using a licensed contractor means that they’ve met the most minimal requirements for that line of work as required by the jurisdiction. Most states require that contractors demonstrate proof of insurance as part of obtaining a trade license or registering.

Licensing or registration protects the homeowner by helping ensure that contractors meet the minimum insurance requirements. Using an unlicensed contractor can cost you in a number of ways.

If your project requires a building permit but the contractor failed to obtain one due to being unlicensed, a building inspector may stop the work until he or she is satisfied that a licensed contractor has obtained the proper permits.

Homeowners who use unlicensed contractors may also find little recourse if a problem develops after the work is completed. In several states, Arizona for example, registered contractors contribute to a compensation fund that seeks to make wronged consumers whole if a problem develops with a registered or a licensed contractor.

Know the terminology

Licensed: Contractors have been granted a trade license as mandated by state and local laws. It generally requires passing competency tests about business practices and trade skills, paying a fee and proving insurance and/or bonding.

Registered: Typically less stringent than licensing, it often requires contractors to prove insurance and pay a fee. Sometimes it requires bonding, but rarely tests competency. A few places use licensing and registration interchangeably.

Bonded: Contractors have an arrangement with a third party (a private bond issuer or a recovery fund held by the licensing municipality). Homeowners may petition for reimbursement through that third party if contractors harm them financially because of shoddy work or failure to pay subcontractors as promised.

Insured: All contractors you hire should be insured. Ask to see a Certificate of Insurance, then call to verify the policy is current and carries enough coverage for your project.

Licensing for trades

Trade-specific licenses, such as those for electricians, plumbers or HVAC technicians, require much more specific knowledge and experience than basic contractor licenses.

Obtaining a trade-specific license generally means that a tradesmen has completed a minimum number of hours of work as an apprentice in the trade, that they’ve passed a standardized written test based on their trade, and that they will complete continuing education courses to renew their license.

However, each state and municipality handles trade licensing in a different way. For example, almost every state in the United States licenses plumbers, with the exception of Kansas, Missouri, Nebraska, New York, Pennsylvania and Wyoming. These states may have individual cities that require plumber’s licenses at a local level. These differences underscore the importance of checking your local regulations for trade licensing before you interview potential contractors or trades.

Find the licensing agency in your state through the the National Association of State Contractors Licensing Agencies.

What is bonding?

In many states, contractors are required to be “bonded” to obtain a license. Traditionally, this means the contractor must purchase a surety bond, which serves as a form of insurance to protect the contractor’s customers if he or she fails to complete the job properly or fails to pay for permits, subcontractors or other financial obligations.

Bonding requirements vary from state to state and even city to city, so it’s in your best interests to know the rules where you live. At the state level, there is usually an agency or board with “professional licensing” in its name or the description of its responsibilities. Licensing agencies can also answer questions about state requirements for bonding. At the county or city level, bonding requirements might be a department responsible for commerce or consumer affairs.

Many homeowners don't realize that a contractor's bond may also protect them from being saddled with an unpaid supply bill or the cost of unpaid workers on the project. Furthermore, a bond could cover any damage to the property as a result of a contractor's negligence or, in serious circumstances, lost or stolen property.

The agency involved in the bond is usually a surety company, which requires the contractor to pay regular premiums to keep the bond renewed. These premiums are factored similarly to insurance plans, as they take into consideration both the amount that the bond covers and the history of the contractor.

To receive monetary compensation for an unsatisfactory performance, a homeowner would need to contact the surety company and provide proof that the job was incomplete or that the contractor failed to pay for materials or other obligations that were the contractor’s responsibility.

Bonds are not only beneficial for the homeowner, but for the contractor as well, since most people won't hire a contractor who doesn't offer the protection of a bond. Most suppliers and subcontractors will only work with a contractor who has a bond in place.

To determine whether your contractor is bonded, ask him or her for a bond number and certification. You should take extra precautions to ensure that both the bond and the license are up to date.

(Photo courtesy of Yvonne Aguirre)

(Photo courtesy of Yvonne Aguirre)

Why insurance matters

Most states require that contractors demonstrate proof of insurance as part of obtaining a trade license or registering.

Contractor or business insurance usually falls into two types:

1. Liability — Covers property damage and injuries caused by the contractor's work. It will not normally pay the cost of repairing or replacing bad work; that's the purpose of the bond.

2. Workers' compensation — Provides payments to injured workers, without regard to who was at fault in the accident, for lost wages and medical services. It also provides benefits to the contractor's family in the event of death. If the owner is the only employee, workers' comp may or may not be required, depending on the state.

Without these types of contractor insurance, consumers could end up paying out of their own pocket if their homeowner's policy is insufficient to cover the bills should a contractor become injured or an accident occurs on the consumer’s property.

Any contractor you hire should be insured. When interviewing a prospective company, ask to see a current Certificate of Insurance then call the insurance company to verify that the policy is current and the coverage is sufficient for your project.

hand with pen signing contract

Many contractors ask for a down payment to hold your place on their schedule or to pay for some materials in advance, but consumers should never pay the full amount in advance. (Photo by Katie Jacewicz)

Contractor verification tips

• Before hiring, check contractors' listings on Angie's ListWe ask all companies on Angie's List to attest that they’re in compliance with trade licensing laws. We also conduct random audits to ensure their compliance. 

• Determine whether contractors must be licensed to perform the job. If so, ask for their trade license number — not to be confused with their business or occupational license number — and proof of bonding and insurance. Make sure all are current and cover your project.

• Verify the information with your state licensing board: Most states offer an online database that you can search or a hotline you can call to make sure contractors' licenses are valid and current. Also check for complaints or disciplinary actions against the company you're considering hiring.

• Research local licensing requirements: Many municipalities govern with their own regulations, in addition to or instead of state laws. Check requirements and license status with local departments of commerce, consumer affairs or professional regulation.

• Once you've settled on a licensed contractor, keep all paperwork: Include proof of licensing, bonding and insurance, the contract, invoices, proof of payment, and all letters and e-mails. Photos of the job in progress can be helpful, too.

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